Best time to buy stocks? After a market crash

Commentary: Old Masters of Wall Street teach the art of investing

The mother of all modern manias, the Tulip mania saw prices for fancy tulip bulbs soar to prices many times a skilled artisan’s annual income. A Satire on the Folly of Tulip Mania by 17th Century Flemish painter Brueghel the Younger is a clear indictment against mindless speculation.

SAN FRANCISCO (MarketWatch) — Wall Street has never been a market for old men — or women — but when the going gets tough, the graying veterans get the 3 a.m. call for help.

Today’s stock-market gurus were 25 years younger on Oct. 19, 1987, when they learned a painful lesson in the throes of a full-blown investor panic. The Dow Jones Industrial Average
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lost almost a quarter of its value that day — its worst single-session percentage drop ever. “Black Monday” conjured fears of that other October crash almost 60 years earlier, which ushered in the Great Depression.

In fact, the day after Black Monday was a terrific time to buy stocks.

A $10,000 stake in the 30 Dow stocks on Oct. 20, 1987 would be worth more than $137,000 now, according to investment researcher Morningstar Inc. That’s an 11% annualized return, including dividends, and even factoring in shareholders’ “lost decade” between 2000 and 2010.

But buying at points of maximum pessimism takes steel nerves most investors don’t have. Few of us could readily follow Baron Nathan Rothschild’s famous dictum to “buy when there’s blood in the streets — even if it’s your own.” Fear and doubt, in our own lives or caroming off of global, large-scale events, are powerful and limiting emotions. Read more: David Rosenberg on how to protect your money from the next stock crash.

So how do you take the plunge after a plunge?

The old Masters of Wall Street: how well they understood — and still do. Market pros see the wisdom in Warren Buffett’s admonition, channeling his mentor Benjamin Graham, to “be greedy when others are fearful, and fearful when others are greedy.” Read more: Warren Buffett's winning ways, 50 years on.

10 lessons from the market crash of 1987The more things change, the more they stay they same, except they happen a lot faster now. Here’s some wisdom from investors who were in the trenches 25 years ago when the stock market saw its biggest one-day percent drop.

They heed the advice of the late Sir John Templeton, the legendary stockpicker, who included “Do not be fearful or negative too often” among his “16 Rules for Investment Success.” Read more: Templeton's 16 rules.

Templeton was one of them. “Let’s find stocks to buy” was his reaction to the crash, recalled Martin Flanagan, now chief executive of mutual-fund firm Invesco Ltd. and then the chief operating officer of Templeton’s firm.

“Today you could see that was an obvious thing to do,” Flanagan recounted in an obituary of Templeton in July 2008. “At the time it was not obvious at all. To have that kind of conviction and leadership is absolutely unique.” Read more: John Templeton, a pioneer investor.

Most of us, in contrast, would be inclined to sell on the cheap during downturns and hold tight when prices are expensive.

“In fearful times, people think that returns will be low and risk is high. In times of exuberance, people think that returns will be high and risk is low,” said Meir Statman, a finance professor at Santa Clara University in California.

Statman added: “First, understand this is a natural emotion. Second, find ways to counter it. You have to be a contrarian with your emotions. If your emotions say put it all in gold, you should have another voice — a voice of reason — saying if gold is so good, the price must be reflecting that.” Read more: Why another stock crash like 1987 is inevitable.

Easier said than done. What in someone’s wiring allows them to override the instinct to run from danger, and to give up a seat at the table when everyone else is eager to play?

Statman ventures that its helpful for investors to think like traders, who tend to see the big picture. They realize that one bad day in the market isn’t going to wipe them out, so they regroup and get back on the horse.

“Losses are part of what you are going to experience,” Statman said. “It’s not the end of the world.”

Behavioral studies show that people with such an attitude don’t have as much loss aversion — our strong preference to avoid losses even more than make a gain. “They know that not every decision is going to be a winning decision, but they ask themselves, What is a smart decision?” Statman said. “If they continue to make smart decisions, then luck is going to average out.”

Big scores after tumultuous events can also iron out a lot of misses.

“Opportunities to make fortunes usually come in times of greatest dislocation,” said Soo Chuen Tan, a managing member of investment firm Discerene Value Advisors in Stamford, Conn. “You can train yourself to look for dislocations and read all the material on value investing and see the returns one can get if one invests at points of maximum pessimism.

“But that only takes you part of the way,” Tan added. “An important element of value investing is psychological temperament. You either ‘get’ it in your gut, or you don’t. When you read a headline about Greece blowing up, do you think, ‘Where’s my cash and can I move it to a safer bank account?’ Or do you say ‘When’s the next plane out to Athens?’”

MarketWatch this week has been revisiting the 1987 stock market crash. What do you think? Do you expect another crash like 1987’s? Make yourself heard: Click here to take our poll:

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